Audit and Assurance DAS Practice Questions 2021 PDF

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Audit Data Analytics Software Professional Level Audit and Assurance - Practice Questions v2

2021 exams

Audit Data Analytics Software Audit and Assurance Practice Questions – 2021 v2 Copyright © ICAEW 2021

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INTRODUCTION 1.1

Background

Six Practice Questions are provided. Each question demonstrates how the audit data analytics software (the software) can be tested in the Audit and Assurance exams in 2021. You should only attempt these Practice Questions having studied the Explanatory Guidance Notes for the audit data analytics software. These Explanatory Guidance Notes explain and demonstrate how to use the software in the context of the Audit and Assurance exam and provide the basic knowledge, understanding and skills required to attempt these Practice Questions in a meaningful way. Both the Explanatory Guidance Notes and the Practice Questions use the same version of the software. They also have the same data contained within the software, which relates to a real company, Elephant Company. You can access the data set used in all the Practice Questions here:

Access data analytics software You will be asked to log in to the ICAEW website to use this link, if you are not already logged in. 1.2

Underlying assumptions of the Practice Questions

Whilst all six Practice Questions use the same software and the same data set contained within that software, they should be considered as six separate companies. They are therefore named Elephant One to Elephant Six to emphasise that they are different entities. The Elephant company provides marketing services, mainly to digital businesses based in the UK (domestic) and the rest of Europe (overseas). However, whilst this is the core business model for all Practice Questions, each question scenario is a separate company and will therefore explain and develop additions to, and variations of, the core business model.

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Aside from the business model, the scenarios differ in each Practice Question in terms of the audit risks, roles of individuals, activities, accounting problems, and additional transactions outside the data in the software. Issues described in one company scenario (eg Elephant Two) should not therefore be assumed to exist in another company in another Practice Question (eg Elephant Four). In the real Audit and Assurance exam, the version of the software will be the same as that in the Guidance Notes and Practice Questions, but the data contained within it will be a different real company from Elephant.

1.3

The structure and content of the Practice Questions

Each of the Practice Questions is either: • A full Audit and Assurance long-form exam question; or • Part of a full Audit and Assurance long-form exam type question (typically two or three requirements). There is one Practice Question of 37 marks to illustrate what a larger long-form question (ie usually Question 2) in an actual Audit and Assurance exam might look like. The other five Practice Questions are typically 17-22 marks each which may be either: • Part of an Audit and Assurance real exam Question 2 (ie some requirements, but not the full question), or • A typical Question 3 or Question 4 from the Audit and Assurance real exam, normally with 15-25 marks and therefore being the full question. Within the overall marks for each Practice Question, up to 10 marks will be dependent on direct use of the software to answer the requirement. These marks cannot be obtained without using the software. The remaining marks relate to the scenario in the relevant Practice Question, but they are not directly dependent on using the software. In the real Audit and Assurance exam, the software will only be tested in one question in each exam, but that question could be any of the long-form questions. There are three elements to each Practice Question: • The question. • Mark plan (traditional mark plan – but with narrative references to the data analytics software).

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•

Appendix - Screen shots showing the visualisations that were useful in obtaining the answer and which support the narrative in the mark plan (but are not part of the answer).

The software contains a series of visualisations which you may be required to interrogate, analyse and interpret. However, for Audit and Assurance exams in 2021 you will not be able to copy visualisations (or any other information) from the software into your script. Therefore, the screenshots in the Appendix of each question are for guidance only, to show how, for each Practice Question, the answer was obtained using the software. You will not be able to replicate the Appendix of the Practice Questions in the exam.

1.4

Approaching the Practice Questions

The Practice Questions use a range of question styles to test different aspects of auditing and assurance knowledge, understanding and skills. In so doing, they will require you to use a variety of tools within the software and will test different areas of auditing and assurance. You will also need to draw upon knowledge of Accounting from your earlier studies to understand the double entry used in the data in the software.

1.5

Applying skills

The application of the software tools to the data will require using key skills such as data assimilation, structuring of data and judgement. For example, skills of judgement may be tested in some questions where you need to select the most appropriate modules, tools and visualisations from the software. There can be a variety of ways within the audit software to achieve a given task, but judgement may be needed to select the easiest and quickest way to discover the required information from the data available in the software. Also, the software contains all the data from a real company. This is considerably more information than would be available in a traditional exam question. This places a greater emphasis on your ability to identify and use relevant data. There is also increased risk of getting distracted by information and issues not directly related to the requirement, so you also need to ensure that you identify and prioritise key pieces of information and issues and stay on task in order to complete the question in the time available.

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The mark plans are more detailed than could be expected under exam conditions of even the best candidates. However, they are indicative of the wide range of points that can be made. In using real company data and real-world commercial software, these skills are intended to replicate the skills required in the workplace. 1.6

Dates

Elephant’s accounting year end for the data in the software is 31 December 2018. Each Practice Question will state an assumed date within the scenario where you are undertaking a role in the audit of Elephant. Typically, this will be in the first few months of 2019 (ie shortly after Elephant’s accounting year-end). 1.7

Which browser and which device?

The software works on most browsers. However, it is strongly recommended that you do not use Safari. If you use a laptop, some visualisations may appear slightly more compressed than shown in these guidance notes or may not show the full screen. It is recommended that you do not use an iPad or other tablet or phone to access the software.

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2.

CONTENTS – THE QUESTIONS

Question

Marks available

Time available (minutes)

Exam question type

Summary

Elephant One

18

27

Q3 or Q4

The question uses the Heat Map and Bar Chart in the Explore module to consider key audit risks.

Elephant Two

21

31.5

Q3 or Q4

The question uses the Metrics module to assess gearing and liquidity.

Elephant Three

37

55.5

Q2

This question gives an indication of what a larger long-form question might look like. The question uses the Explore module and tests audit risks and procedures.

Elephant Four

17

25.5

Part of a Q2

This question gives an indication of what some key requirements of a Question 2 might look like. The question uses the Explore module and tests audit risks and procedures.

Elephant Five

18

27

Part of a Q2

The question uses the Explore module to give an indication of what some key requirements of a Question 2 might look like. Audit quality control issues are also considered.

Elephant Six

22

33

Q3 or Q4

The question uses the CascadeRevenue module to consider high risk transactions relating to revenue and receivables. It also considers irrecoverable receivables.

Note The data in the audit software is common to all questions. The data is available here.

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Where the risk sliders (showing red dots) have been set at high risk, you do not need to address this unless the question specifically asks you to do so.

ELEPHANT ONE (HEAT MAP AND BAR CHART) Click below to access the data analytics software

Data analytics software Assume the date is 7 March 2019. Your firm is the external auditor of Elephant Company (Elephant). Elephant provides marketing services to digital businesses based in the UK and the rest of Europe. for the provision of specific marketing projects. A typical marketing contract comprises a In addition, the contract will specify the s. You are an audit senior on the Elephant audit for the year ended 31 December 2018. for the audit of Elephant has been . The executive directors of Elephant founded the company and retain significant shareholdings. Executive involving the payment of substantial cash . The board of Elephant stated that they intend to This will provide an opportunity to raise additional capital for Elephant and permit the executive directors to realise part of their shareholdings. The investment bank advising Elephant has informed the directors that a The audit engagement partner has identified Land, buildings & improvement within non-current assets as a key audit risk and has asked you to look into this area. You have identified that two accounts make up Land, buildings & improvement. 13010 Fixtures & fittings 13020 Office Equipment The Heat Map visualisation for Land, buildings & improvement is shown below.

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At the planning stage, it was identified that the Management has also informed you that during the year which allows to , and Elephant to respond to them online. This expenditure was capitalised in accordance with Elephant’s accounting policies. You have identified the as being in the from the Heat Map. The details of this transaction, shown below, indicate that it relates to the .

In response to your preliminary inquiries related to this matter, Elephant’s finance director, Frank Wright, stated that the costs capitalised relate to the time spent by Elephant’s in He added that the entries posted

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reflect the fact that initially the

ommerce website by Elephant’s in .

Requirements 1.1 Explain why your audit manager has identified Land, buildings & improvement as a key audit risk. (4 marks) 1.2 Identify and explain any transactions related to Land, buildings & improvement (other than Transaction SRC006972 above) which may represent key audit risks. Justify why each transaction is a key audit risk. Use the Heat Map and Bar chart. (4 marks) 1.3 Describe appropriate audit procedures to address the key audit risks related to the transactions identified in 1.1 and 1.2 above. (10 marks) Total: 18 marks

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Elephant One (Mark plan) Marking guide

Headroom marks 1.1

Risk of overstatement Increase of £129k/% increases are material High risk transactions on Heat Map Mgt bias and reasons Need for estimates/judgement Development costs may not meet capitalisation criteria Risk of misclassification Round sum journals

½ 1 ½ 2 ½ ½ 1 1

Max 4 marks 1.2

Identification of amounts/total Relationship to materiality Identification and analysis of entries through Suspense a/c Effect of entries on NCA and Sales Discussion of unusual nature of entries/dual created dates Identification of day and person posting Fraud risk Round numbers and equal apportionment Max 4 marks

1.3

7 1 ½ 2 1 1 ½ ½ 1

7½

1 mark for each valid procedure related to:

Audit Data Analytics Software Audit and Assurance Practice Questions – 2021 v2 Copyright © ICAEW 2021

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Website development costs and suspense ‘adjustments’ Max 10 marks

17

Total marks

31½

Maximum

18

1.1 There is a risk that the accounts comprising Land, buildings & improvement are overstated. The increase in the year of £129,126 is a multiple of audit materiality of £30,000. Fixtures and fittings have increased by 109% and Office equipment by 56%. –

statement of Land, buildings & improvement is exacerbated by management’s in order to . This arises from the impact of higher profits on directors’ bonuses. In addition, higher profit increases the p Website devp costs

The capitalisation of already identified presents high risk of misstatement due to the need for an estimate by management of the costs to be capitalised.

The photography account 61060 is an expense account. The credit of £20,000 reduces this expense and the debit (part of the £95,000) increases the website development cost as an asset. An explanation is required of management as to why this amount was reclassified from an expense to an asset. The round sum nature of the £95,000 debited to Office Equipment 13020 also suggests estimation rather than a precise record of the amounts incurred to develop the website.

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The incentives to overstate profit referred to above may lead to management bias in the use of judgement to arrive at an estimate of website development costs for capitalisation. The challenging business environment faced by Elephant may add further incentives for management to capitalise costs to support reported profit. Land, buildings and improvement does not accurately describe the accounts included under this heading (Office Equipment and Fixtures & Fittings). In addition, website development cost have been included in 13020 – Office Equipment. This suggests an increased risk of misclassification of asset balances in the financial statements

1.2 An examination of the higher risk transactions using the Heat Map visualization reveals amounts debited from Suspense Account 990 as follows: Description Adj Q1 Adj Q2 Adj Q3 Total

£ Suspense Suspense Suspense

5,000 9,000 11,111 25,111

The analysis of the transactions from the heat map indicates for each transaction. This appears to suggest that the debit and credit entries were created on different dates. This would be very unusual and indicate a systems error in Elephant’s accou In either case this anomaly may indicate increased risk and merits further investigation. An examination of

indicates that these entries are in effect . Each amount appears to be an apportionment of an amount credited to sales with the narrative description ‘Correct Q1 sales’, ‘Correct Q2 sales’ and ‘Adjust Q3 sales’. It can be seen from an analysis of Suspense Account 990 that the credit entries to Domestic Sales 51010 appears to be matched through the suspense account (13025 Office Equipment Depreciation and 11010 Motor vehicles).

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It is difficult to construct a valid justification for these entries. One would anticipate that the debit entry related to a credit to domestic sales would be to either cash or receivables dependent on the nature of the sale. An analysis of the posting details using the Bar Chart visualisation reveals that these entries (and those related to the capitalisation of website development) were posted by Frank Wright on a Saturday.

The round number nature of the amounts and the equal apportionment across three non-current asset account are also indicators of higher risk. Thus, these entries increase the risk that Land, buildings & improvement (and Sales Revenue) is overstated. 1.3 Capitalisation of website development costs Procedures include: • Inquire of management as to the methodology used to identify costs for capitalisation. • Ascertain the • Request a listing/schedule of the developer costs that have been capitalised. • Verify costs capitalised against developers’ time sheets or similar evidence. • Compare the total of developer costs incurred to amount credited to amounts receivable to ensure profit margin has not been capitalised. • Request information related to the method used to determine the amount of photography costs capitalised as website development (including a listing/schedule of external photography invoices capitalised as website development). Consider reasonableness. • of photography invoices •

website development costs

•

Consider whether the capitalised costs

• •

Inquire of management as to the basis for amortisation and assess for reasonableness to verify that it has been applied correctly.

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•

Identify whether the journal entries were correctly authorised.

Entries from Suspense Account 990 Procedures include: • • • • • •

Seek explanation from management as to the nature of the underlying transactions that these entries reflect. Inquire as to the rationale and basis on which the amount credited to sales is apportioned across the three asset accounts. Inquire as to why there is not an equivalent set of entries for Quarter 4. Identify and verify the asset to which the debits to Fixtures & Fittings 13010 relate. Verify amounts debited to Fixtures and Fittings against invoices for expenditure. Identify whether the journal entries were correctly authorised.

APPENDIX TO THE ANSWER: ELEPHANT ONE The following section explains the audit software screens used and the navigation methods but is not itself part of the answer. (Note: the audit software screens cannot be cut and pasted from the software into your answer in the Audit and Assurance ...